The short sale purchase agreement – boilerplate agreement or as an addendum

Form-of-the-week: Purchase Agreement with Short Sale Contingency – Form 150-1 and 274

Selecting the right purchase agreement

For a real estate transaction conveying fee ownership of a property, the primary document a buyer’s agent uses to negotiate their buyer’s acquisition of property is a purchase agreement. [See RPI Form 150-159]

The use of different varieties of purchase agreements is required for different types of properties, buyers and financing arrangements. The various purchase agreements contain provisions necessary for the buyer’s agent to readily negotiate the purchase of a particular property with a particular seller.

Three basic categories of purchase agreements exist to formalize real estate transactions. The categories are influenced primarily by legislation and court decisions addressing the handling by the seller’s agent of the disclosures and due diligence investigations required of them to properly market properties.

The three categories of purchase agreements are for the acquisition of:

Within each category of purchase agreements, several variations exist. The variations cater to:

the use of a property;

the diverse arrangements for payment of the price;

property conditions which affect value; and

loan discount approvals on a short sale within the one-to-four unit residential property.

Negotiating an SFR sale, with or without an NOD

The distinguishing fact for a buyer’s agent’s selection of the type of purchase agreement used to prepare an offer to acquire a seller-occupied single family residence (SFR) is whether or not the property is in foreclosure and subject to a recorded Notice of Default (NOD).

When title to a seller-occupied SFR is not subject to a recorded NOD, the buyer’s agent simply uses a purchase agreement which provides for the financing arrangements the buyer is going to use — conventional, FHA or VA. This is the case whether or not the buyer intends to occupy the property as their primary residence. [See RPIForm 150, 152 and 153]

However, when the buyer is an investor who does not intend to occupy the seller-occupied SFR as their primary residence and the title is subject to a recorded NOD, equity purchase (EP) laws are triggered calling for the buyer’s compliance when preparing their offer. [See RPIForm 156 and 156-1]

To comply with EP law, the agent selects a variation of the equity purchase agreement to prepare an offer since all the following conditions exist:

the SFR for sale is an owner-occupied, one-to-four unit residential property;

Next is the selection of the proper version of these one-to-four unit purchase agreement forms to be used based on whether the principal balance on the mortgage(s) exceeds the price the buyer is willing to offer for the property.

When a negative equity situation exists, the seller’s agent discloses this information in MLS publications and any other release of critical information for marketing the property. [Holmes v. Summer (2010) 188 CA4th 1510]

No NOD, but a negative-equity short sale

When an SFR has negative equity but is not in foreclosure — i.e., no NOD has been recorded — the buyer’s agent uses a conventional purchase agreement which contains short sale provisions to prepare the buyer’s offer to purchase the property. The short sale provisions condition the seller’s closing of escrow on first obtaining a written payoff demand from their mortgage holder for the net proceeds of the sale as full satisfaction of all amounts owed the mortgage holder. [See RPIForm 150-1 § 11.1]

Through a payoff demand, the mortgage holder agrees to accept the seller’s net sales proceeds on the sale at the price paid by a buyer, an amount lower than the mortgage holder’s outstanding mortgage balance.

The purchase agreement offer with the short sale contingency provision becomes a binding written contract between the buyer and seller on acceptance. However, if the seller is unable to obtain a payoff demand from the mortgage holder(s) who hold one or multiple liens on the property, the agreement may be terminated and rendered unenforceable at the discretion of either the buyer or seller. [See RPIForm 150-1 §12.2]

The Purchase Agreement (One-to-Four Residential Units – With Short Sale Contingency) – Form 150-1 published by RPI (Realty Publications, Inc.) is a comprehensive “boilerplate” purchase agreement with additional and modified provisions specific to short sale arrangements. Form 150-1 serves as a checklist presenting the various conventional financing arrangements available to the buyer to fund the purchase price, and includes conditions a prudent buyer and their agent consider when making an offer to purchase. As for the seller, their performance is conditioned on discounted payoff demands made by the holders of the mortgages. [See RPIForm 150-1]

Components of the purchase agreement with short sale contingency

Each Section of Form 150-1 has a separate purpose and need for enforcement. The segments include:

Identification: The date and place of preparation for referencing the agreement, the name of the buyer, the amount of any good-faith deposit, a description of the real estate, an inventory of any personal property included in the transfer and the number of pages contained in the agreement and its addenda are set out as FACTS in Sections 1 and 2.

Price and terms: Variations for payment of the purchase price by cash or conventional purchase-assist financing are set out as TERMS in Sections 3 through 6, a checklist of provisions to consider. Terms are selected by checking boxes and filling blanks as desired.

Acceptance and performance: The period for acceptance to form a binding contract, broker’s authorization to extend escrow, cancellation procedures, financing and the sale of other property closing contingencies, Internal Revenue Code (IRC) §1031 cooperation and liability limitations are established in Section 7.

Property Conditions: The buyer’s confirmation of the physical condition of the property as disclosed by the seller prior to acceptance is confirmed by the seller’s delivery of reports, warranty policies, certifications, disclosure statements, an environmental, lead-based paint and earthquake safety booklet, any property operating cost and income statements, and any homeowners’ association (HOA) documents not handed to the buyer prior to entry into the purchase agreement, as well as by the buyer’s initial inspection (personally or by a home inspector) and final inspection at closing to confirm the seller has eliminated defects known, but not disclosed, prior to acceptance, are provided in Section 8.

Notice of supplemental property tax: The buyer is advised they will receive one or two supplemental property tax bills due to a change in ownership in Section 10.

Notice regarding gas and hazardous liquid pipelines: The buyer is advised that information is available to the public regarding the location of gas and hazardous liquid transmission pipelines in Section 11.

Loan Discount Condition (Short Sale Contingency): The close of escrow is conditioned on the seller obtaining payoff demands at a discount from the mortgage holder(s) of record in full satisfaction of all amounts owed in Section 12.

Brokerage and agency: Transaction data is authorized for release to trade sources, the brokerage fee is set and the delivery of the Agency Law Disclosure to both the buyer and seller are set out in Section 13. [See RPI Form 305]

Signatures: The seller and buyer bind each other to perform as agreed by signing and dating their signatures. This Section also includes the confirmation of the agency undertaken by the brokers and their agents on behalf of one or both principals to the agreement. [See RPIForm 150-1]

Short sale addendum

Alternatively, when a buyer intends to finance their purchase using Federal Housing Administration (FHA) or Department of Veterans Affairs (VA) financing, brokers and agents may structure the short sale transaction using RPI’s FHA or VA variations of the purchase agreement and attach RPI’s Short Sale Addendum – Loan Discount Approval – Form 274 containing the mortgage discount approval language. [See RPIForm 152, 153 and 274]

The language contained in the Short Sale Addendum mirrors the short sale contingency provision contained in Form 150-1.

Observations

Providing forms with maximum risk reduction and fee protection for brokers and their agents is RPI’s policy for drafting real estate forms. Thus, RPI’s purchase agreements exclude provisions which tend to increase the risk of litigation. As a matter of policy, provisions that work against the ultimate best interests of the buyer, seller and brokers are excluded as a risk mitigation feature.

Excluded provisions seen in purchase agreements published from other forms providers include:

an attorney fee provision, since it promotes litigation and inhibits resolution;

a time-essence clause, since future performance (closing) dates are estimates by the agents of the time needed to close and are improperly used by sellers in rising markets to obstruct or cancel the transaction before the buyer and brokers are able to timely comply with performance provisions in the agreement;

the liquidated damages provision, since it creates wrongful expectations by sellers of windfall profits and unenforceable penalties; and

the arbitration provision, since arbitration decisions are final and unappealable without judicial oversight to assure the arbitrator’s award will be fair or correct, a disservice to the real estate industry and the broader public.

RPI’s purchase agreements include a mandatory mediation provision which mitigates the risk of a legal battle. Mediation of any dispute must be undertaken as a precursor to filing an action, be it arbitration or litiga­tion. Mediation is good public policy as it is expeditious and is the most cost effective method of dispute resolution society has developed.

Also, since the buyer and their agent are the transaction participants who make and submit an offer to purchase, RPI’s purchase agreements are designed with the buyer in mind. Thus, the form does not favor the seller in the structuring of provisions as do forms published by other providers.

Editor’s note — RPI publishes a wide selection of purchase agreements which cater to different types of transactions, such as principal-to-principal and commercial property acquisitions. [See RPI Form 150-159]

2 Comments

William Matz
on November 17, 2015 at 9:11 pm

With the recent protection offered by CCP 580e, short sales short sales are a good option for many underwater borrowers, especially given this year’s Supreme Court decision that eliminates the “stripping” of 2d’s. However, borrowers need to remember that although their liability to the lender[s] is eliminated, they remain fully liable to the buyers for any disclosure violations; so over-disclose. Real estate agents handling short sales will do their sellers and themselves a big favor by making sure that short sellers receive legal counseling on the liability and tax issues.

I’m in a deal now and it surprises me how no one reads the documents. So much is over looked. They all operate as if th contract does not apply. I’m constantly pointing out facts and they always reply, this is how we always do it. Serious issues overlooked.

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